Georgia has rapidly become the preferred destination for the entertainment industry. We could claim it’s because of our great weather, variable landscapes, ease of transportation or friendly working conditions, but we would be kidding ourselves. The entertainment industry is drawn to Georgia because of its tax incentives. Now that you have wrapped your movie, shot your television series or finished your commercial, what do you do next?
Much of the success of the incentive program depends on the ease of monetization of the tax incentives earned. Producers want to be able to sell their credits to Georgia taxpayers. In order to do so, a verification process needs to take place so that the buyers have some level of comfort that the credits will be accepted when they file their tax returns. That verification process normally is conducted in one of two ways. The first is to have a certified public accountant review and test your expenses to make sure they qualify for the tax credit. The other way is to undergo a voluntary film credit audit performed by the Georgia Department of Revenue.
If you choose to go the certified public accountant route, they will review the categorization of your production costs, determine if they qualify under the program and perform selected tests to calculate the amount of the credit available to sell. They will prepare a report that is sometimes referred to as a “comfort letter”. The fee for this service normally ranges between $5,000 and $10,000 depending on the condition of the records and the size of the production.
Alternatively, a production company may decide to use the voluntary audit method. The advantage with this method is that the credit is then approved by the Georgia Department of Revenue. The Department is bound by their findings even if there is a subsequent audit for non-film tax credit reasons. The fee for this service is $5,000 for productions up to $1,000,000, $10,000 for productions from $1,000,000 to $5,000,000, $20,000 from $5,000,000 to $10,000,000 and $25,000 for productions in excess of $10,000,000. Under certain circumstances the Department may charge additional fees.
So which option should a production company choose? If a binding guarantee is important, then the voluntary audit option with the Georgia Department of Revenue is the way to go. The downsides with using this option are that it may be pricier and could take longer than using a CPA. The fee must be paid before the production will be placed in a queue. If a reasonably quick turnaround is needed, this may not be a good option.
CPA firms are often able to provide their services more inexpensively and in a timelier manner. You are able to work face to face with individuals who are familiar with the industry and how it works rather than via telephone and e-mail with state employees who live and work in California. (Yes, that is correct. The state has taken a tax incentive program designed to promote economic growth in Georgia and used it to hire and pay employees in California because they come straight out of west coast production houses and “speak the language”).
Is the voluntary state audit the best choice for your production? Maybe so. On the other hand, after contacting several Department of Revenue representatives, we obtained no evidence that the CPA comfort letter results in a difference in the amount of tax credit that is earned or that there are any systemic problems with unallowable costs being claimed. If you do choose the CPA route, however, make sure you are working with one with experience with the industry and who is familiar with the requirements.
About the authors: Greg Hammonds (firstname.lastname@example.org) is the managing partner and Kristy Clabaugh (email@example.com) is the business development coordinator for Whaley Hammonds Tomasello, P.C. Their CPA firm is located in suburban Atlanta.